Cayman Islands: Reserved Powers

INTRODUCTION

The Cayman Islands adopted a trust law amendment which is intended to clarify the issue commonly known as "invalid testamentary dispositions" or "sham trusts". The amendment, which is called the Trusts (Amendment)(Immediate Effect and Reserved Powers) Law, 1998, came into effect on 11 May 1998 and is now contained in Part III of the Trust Law (as amended)).

AGENT OR TRUSTEE?

Where the owner of property technically transfers title to the property to someone else, with instructions to deal with the property entirely as the owner directs and on the death of the owner to deliver the property as a gift to a third party, the person taking possession is merely an agent for the owner and not a trustee. The agency terminates on the owner's death. No interest in the property passes to the third party before the owner dies. Nor will any interest necessarily pass to the third party on the death of the owner because the disposition is regarded as testamentary and, unless it was executed in accordance with the Wills Law, will be invalid.

WHAT POWERS CAN BE RESERVED?

The question which has plagued the international trust industry for many years is: what powers (in aggregate) can be reserved by the settlor of a trust without there being a risk that a Court will deem the arrangement an agency rather than a trust (and therefore testamentary)? The amendment seeks to clarify the position, but care is still required to ensure that the arrangement is not operated as an agency (sometimes referred to as an "operational sham").

The amendment creates a presumption in construing any trust instrument which is not expressed to be a will, testament or codicil, that such trust instrument has immediate effect. Although rebuttable, the presumption is intended to clarify trust instruments in which the settlor retains significant control over the trust assets and the powers of the trustee. The amendment goes on to list a number of specific powers, the reservation or grant of any or all of which will not invalidate the trust or affect the presumption of lifetime effect. These include:

1. power to revoke, vary or amend the trust instrument;
   
   
2. power of appointment of income or capital;
   
   
3. any limited beneficial interest in the trust property;
   
   
4. power to act as a director or officer of any company owned by the trust;
   
   
5. power to give the trustee binding directions in relation to the investment of the trust property;
   
   
6. power to appoint, add or remove any trustee, protector or beneficiary;
   
   
7. power to change the governing law and forum for administration; and
   
   
8. power to require the trustee to obtain consent before exercising a power. The amendment further provides that a trustee who complies with a valid exercise of any of the reserved powers will not be in breach of trust.
   
   

The amendment further provides that a trustee who complies with a valid exercise of any of the reserved powers will not be in breach of trust

TRUSTS AFFECTED BY AMENDMENT

The amendment applies to all trusts created after 11 May 1998. The amendment also entitles the trustees of trusts already existing at that time to extend the application of the amendment to those trusts by deed. It is felt that this important clarification will help the international financial community meet market demand and, at the same time, retain the essential features and benefits of the common law trust.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.